Construction Defect Destroys Home, Forty Years Later
June 19, 2012 — CDJ Staff
Fire investigators in Monroe, North Carolina have blamed a nail as the source of a fire that lead to a home being declared a total loss. The nail, part of the original construction, nicked a wire within a wall, causing a short, which started a fire. The home was built in the late 1960s.
WBTV reported that the homeowner was awakened by a power outage. He went outside and saw flames coming from a vent in the roof. He was unable to contain the fire with a garden hose. Neighbors called firemen who were able to stop the blaze.
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Defect Claims as Occurrences? Check Your State Laws
July 10, 2012 — CDJ Staff
Although four states have defined construction defect claims as occurrences, contractors are still dealing with “coverage gaps for faulty work construction,” says Mike Tsikoudakis in a piece at Business Insurance. He quotes Julian Ehrlich, the senior VP of claims for Aon Risk Services that “one of the interesting and compelling aspects of the issue of coverage for defective construction is that jurisdictions differ, so policyholders don’t know what they’re going to get.” He further notes that “in context of construction defect, the term ‘occurrence’ is ambiguous.”
One problem, as noted by Jeffrey J. Vita, a partner at Saxe Doernberger & Vita, is that construction firms end up needing to simultaneously defend against defect claims and to also file suit to be certain their insurance firms will cover claims. Insurance for construction defect claims is described as “expensive and somewhat limited.” Mr. Vita expects more states to help this situation with new laws, clarifying what is an occurrence.
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Geometrically Defined Drainage Cavities in EIFS as a Guard Against Defects
July 10, 2012 — CDJ Staff
The blog Stucco & Insulation Contractor writes up some details on a “relatively new modification to modern Exterior Insulation Finish Systems,” known as “geometrically defined insulation boards.” They note that the insulation has grooves cut in the back to provide a route for water to drain, instead of getting trapped. They note that when EIFS is installed by a skilled applicator, this is unnecessary. However, with less experienced (and cheaper) installers, problems are more likely.
By cutting these channels, the application of EIFS is rendered “idiot proof,” as they note. Their preference would be that EIFS installers take the time to do the job right, but call this “a step in the right direction.”
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Bar to Raise on Green Standard
November 7, 2012 — CDJ Staff
Next June, members of the U.S. Green Building Council will be voting on changes to the LEED green building standard. “The bar is getting raised,” said Navad Malin of BuildingGreen, a consulting and publishing firm, in an article in USA Today. Under the proposed guidelines, builders would have to project energy and water use for five years as part of the certification process. However, if the occupants aren’t as green as the builders anticipated, the buildings will not lose their certification.
The new rules will include higher energy standards, award points for avoiding potentially hazardous materials, and even determine what kind of plumbing items can be used.
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Ensuing Loss Provision Found Ambiguous
April 25, 2012 — Tred Eyerly, Construction Law Hawaii
After the insurer denied coverage in a homeowner’s policy for construction defects under various exclusions, the court found the ensuing loss provision was ambiguous.Kesling v. Am. Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 38857 (D. Colo. March 22, 2012).
After purchasing a home from the sellers, the insureds noticed problems with the deck of the home. Massive cracking appeared, causing lifting and leaking on the deck and water running through the exterior foundation wall into the home. There was also damage to the roof and crawlspace.
The insureds had a homeowner’s policy with American Family, which covered accidental direct physical loss to property described in the policy unless the loss was excluded. They requested coverage for "conditions, defects and damages." American Family denied coverage because wear and tear, as well as damage to foundations, floors and roofs were excluded. The policy did provide coverage, however, for "any resulting loss to property described . . . above, not excluded or excepted in this policy.
When coverage was denied, the insureds sued American Family.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Court Sends Construction Defect Case from Kansas to Missouri
August 2, 2012 — CDJ Staff
The United State Court of Appeals for the Tenth Circuit has ruled in Mid-Continent Casualty Company v. The Village at Deer Creek Homeowners Association. The prior case was heard by the United States District Court for the District of Kansas. In this appeal, Mid-Continent sought a declaratory judgement. The Village at Deer Creek Homeowners Association moved to dismiss, and the district court had granted this, giving jurisdiction to the Missouri state courts.
The homeowners association had sued Greater Midwest Builders, Ltd., who had constructed the subdivision, in the Kansas state courts. The suit ended with a verdict against Greater Midwest for more than $7 million. The association and other plaintiffs in that case filed for equitable garnishment against State Auto, Mid-Continent, and Greater Midwest. State Auto removed the garnishment action to federal court in Missouri. Mid-Continent moved to sever the actions against it and transfer the case to the District of Kansas.
Subsequently, the plaintiffs filed a notice of voluntary dismissal in the Western District of Missouri. A second garnishment action followed in which Mid-Continent was named as an additional plaintiff. State Auto again removed to the Western District of Missouri, while Mid-Continent moved to sever and transfer to the District of Kansas. The Kansas court granted the association’s motion to dismiss.
In the appeal, Mid-Continent sought a declaratory judgment. This was denied by the appeals court. The district court “concluded that the Missouri courts were better situated to provide complete relief to all parties involved in the coverage dispute.” The appeals court affirmed the association’s movement to dismiss. Mid-Continent’s motion was denied as moot.
Read the court's decision…
Seven Former North San Diego County Landfills are Leaking Contaminants
April 7, 2011 — April 7, 2011 Beverley BevenFlorez - Construction Defect Journal
Deborah Sullivan Brennan of the North County Times reported that seven former dumps in San Diego are leaking contaminants into the surrounding groundwater. John R. Odermatt, a senior engineering geologist for the California Regional Water Quality Control Board s San Diego region, told the North County Times, “the risk to most county residents is very small or negligible, while local water supplies located in more rural areas may be at a somewhat elevated but unquantified level of risk.”
This issue is causing heavy scrutiny of a new proposed landfill in Gregory Canyon. The landfill would be located on 308 acres of undeveloped land near Pala, alongside the San Luis Rey River. The group “Save Gregory Canyon” has been speaking out against the landfill, stating that “the project threatens major detrimental impacts to both surface and groundwater, as well as a potential compromise of the two major San Diego Water Authority pipelines nearby.” Richard Felago, a Gregory Canyon Ltd. Consultant, told the North County Times that the 8-foot-thick liner, composed of layers of gravel and synthetic material, would not leak.
The appeal hearing is being rescheduled later this month after one of the three panelists recused himself due to having a competing interest in the property, according to the article by Gary Warth in the North County Times.
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Construction Defects in Home a Breach of Contract
September 9, 2011 — CDJ Staff
The Supreme Court of North Dakota has ruled in Leno v. K & L Homes, affirming the verdict of the lower court. K & L Homes argued that district court had erred in several ways, including by refusing to instruct the jury on comparative fault, denying a request for inspection, and not allowing a defendant to testify on his observations during jury viewing.
The Lenos purchased a home constructed by K & L Homes, after which they alleged they found cracks, unevenness, and shifting, which they attributed to improper construction. They claimed negligence on the part of K & L Homes. K & L Homes responded that the Lenos were responsible for damage to the home. The Lenos dropped their negligence claim, arguing breach of contract and implied warranties.
Before the trial, after the discovery period had passed, K & L Homes requested to inspect the home. This was rejected by the court. Kelly Moldenhauer, the owner of K & L Homes sought to testify about his observations during the jury’s viewing of the house. The court denied this too. The jury found that K & L was in breach of contract and awarded damages to the Lenos.
The North Dakota Supreme Court noted that K & L Homes gave “warranties that the home had been built according to local building codes and laws, and that the house was fit for its particular purpose as a residence.” The court found that a defective home breached this warranty. Further, the home violated an implied warranty of fitness.
The district court had denied K & L’s request to inspect the home, as the discovery period had ended and it would not give the Lenos time to do further discovery of their own. At the time of the request, there was only twenty-two days before the trial. The Supreme Court ruled that this was not an abuse of discretion of the part of the district court.
The Lenos had requested that Moldenhauer’s testimony not be permitted, as it would “have the same effect as if the court had granted K & L Homes’ pretrial request for inspection.” K & L Homes agreed to this in court, replying, “okay.”
The decision affirms the judgment of the district court and the damages awarded to the Lenos by the jury.
Read the court’s decision…
Court Voids Settlement Agreement in Construction Defect Case
September 1, 2011 — CDJ Staff
A U.S. District Court Judge in Florida has ruled in favor of a company that sought to void a settlement agreement. The case, Water v. HDR Engineering, involved claims of construction defects at Florida’s C.W. Bill Young Regional Reservoir. The Tampa Bay Water Authority attributed these to both HDR Engineering’s design and Bernard Construction Company which had built the embankment. Bernard Construction filed a complaint against their subcontractor, McDonald.
Tampa Bay Water settled with Bernard Construction and McDonald, in an agreement that set a minimum and maximum settlement, but also would “prohibit Barnard and McDonald from presenting any evidence on several claims and positions of TBW, to require Barnard to call certain witnesses at trial, to preclude Barnard and McDonald from calling other witnesses, and to restrict the filing of trial and post-trial motions.” HDR Engineering moved to void the agreement as collusive.
The judge that the agreement¬? contained “133 paragraphs of ‘Agreed Facts’ that the parties stipulated would survive any order declaring the Settlement Agreement void or unenforceable.” He characterized these as stipulating “that Barnard neither caused nor contributed to TBW’s damages.” HDR motioned that a summary judgment be given to Barnard Engineering.
The court found that “the evidence identified by TBW is patently insufficient to survive summary judgment.” Further, TBW’s expert initially held Barnard responsible for “lenses, pockets, streaks and layers within the embankment,” but then later withdrew this assigning the responsibility to HDR. Further, the court notes that, “TBW’s arguments that lenses, pockets, streaks, and layers in the soil wedge caused or contributed to its damages and that Barnard is liable for those damages have been foreclosed by the Agreed Facts.”
As TBW failed to provide sufficient evidence to withstand summary judgment, the court granted summary judgment, mooted the claim against McDonald, and terminated the agreement between TBW and the other parties.
Read the court’s decision…
The Ever-Growing Thicket Of California Civil Code Section 2782
January 6, 2012 — Michael D. Worthing, Borton Petrini
California Civil Code section 2782 imposes limits on indemnity and defense provisions in construction contracts. Since the initial adoption of S.B. 8001 in 2002 (eff. January 1, 2003) section 27822 has been revised several times, and legislative history suggests that interest groups representing builders, developers and sub-contractors, as well as the insurance industry, have seen legislative action on these indemnity and defense issues as part of the overall response to the same economic pressures resulting from construction defect litigation that gave rise to S.B. 800. Amendments in 2005, 2007, 2008 and 2011 (each effective January 1 of the following year) have increasingly entangled the provisions of Section 2782 with various provisions of S.B. 800. The application of section 2782 to construction contracts, and in particular contracts between developer-builders and subcontractors, executed after January 1, 2006, will require a concurrent reading and understanding of S.B. 800, the application of which is itself still in flux.
The time a construction contract was executed will likely determine which version of section 2782, read in connection with provisions of S.B.800, is applicable. Because of the nature of construction defect litigation, the determination of relative rights and liabilities of developer-builders vis-à-vis subcontractors under construction contracts does not become the subject of litigation, and legal and judicial interpretation, until years after the contracts were entered and work performed. As of the date this article is submitted, there has been no case law interpreting or applying any of the post S.B. 800 amendments, in part, and perhaps primarily, because litigation arising from construction contracts executed after January 1, 2006, has not yet reached the appellate courts.
SECTION 2782 AT THE TIME S.B. 800 WAS ENACTED
Section 2782 was originally enacted in 1967 and amended several times to the version in effect when S.B. 800 became law, at which time the section was relatively simple and straightforward. It then consisted of two subdivisions, which have essentially remained unchanged until the most recent amendment during the 2011 legislative session.
Section 2782 (a) prohibited, and still prohibits, provisions in construction contracts that “purport to indemnify the promisee against liability for damages for death or bodily injury to persons, injury to property, or any other loss, damage or expense arising from the sole negligence or willful misconduct of the promise.” This provision essentially prohibits what had been referred to as so-called Type I or “specific” indemnity provisions. In such agreements, the indemnitor [the promisor, that is, the person or entity indemnifying] will indemnify the indemnitee [the promisee, that is, the person or entity being protected by the indemnity] for the indemnitee’s own negligence, whether active or passive, whether the indemnitee is solely negligent or concurrently negligent with the indemnitor. (See, MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 419.)3 Section 2782 (a) has remained essentially intact since the enactment of S.B. 800. It still must be considered and applied to interpret a construction contract. Generally, it will apply to contracts not involving a public agency; the next part of section 2782 specifically governs such contracts.
The second subdivision prohibits provisions in any construction contract with a public agency which purport to impose on the contractor, or relieve the public agency from, liability for the active negligence of the public agency. Subdivision (b) has been revised by the 2011 amendment, discussed below. If a construction contract with the public agency is for residential construction, the standards of S.B. 800 likely apply.4
This was the extent of section 2782 on January 1, 2003, when S.B. 800 went into effect, and remained so until January 1, 2006. This version will govern interpretation and application of indemnity and defense provisions in construction contracts executed before January 1, 2006.5
2005 AMENDMENT
The first “post S.B. 800” change to Section 2782 was in enacted in 2005, effective January 1, 2006, and added two new sections. Subdivision (c) stated (in somewhat greater detail than paraphrased here) that for residential construction contracts, or amendments thereto, entered into after January 1, 2006, a subcontractor cannot be required to indemnify (including the cost to defend) a builder for construction defects that arise out of negligence or design defects of the builder or other independent contractors, or that do not arise out of the scope of the subcontractor=s scope of work. The term “residential construction” was defined by reference to S.B.800 generally, and the term “builder” was defined by reference to section 911 (a part of S.B. 800), for the first time expressly connecting provisions of section 2782 to S.B. 800. Contractual provisions not expressly prohibited were reserved to the agreement of the parties.
What subdivision (c) took away was partially given back by subdivision (d). It stated that “subdivision (c) does not prohibit a subcontractor and builder from mutually agreeing to the timing or immediacy of the defense and provisions for reimbursement of defense fees and costs, so long as that agreement, upon final resolution of the claims, does not waive or modify the provisions of subdivision (c).”6 In addition, it stated that this subdivision (c) did not affect the obligations of an insurance carrier under Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571, which holds that where an insurer has a duty to defend a developer pursuant to an additional insured endorsement obtained under a subcontractor’s policy, that duty generally applies to the entire action, even if the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy. Finally, subdivision (d) stated that the amendment did not affect the builder’s or subcontractor’s obligations under S.B. 800. Both of these latter provisions, relating to the Presley Homes case, and obligations under S.B. 800, have been carried forward essentially intact in subsequent amendments of section 2782.
This version of section 2782 will be applicable to any contract between a builder as defined by section 911 (see fn. 4, above) and a subcontractor executed between January 1, 2006, and December 31, 2008. Thus, a general contractor, etc., who is not a builder is not subject to the provisions added by the 2005 amendment; this changed with the next amendment.
It is not clear whether this version would apply to a contract entered before January 1, 2006, but amended after that date. Subdivision (c) applies to “all construction contracts, and amendments thereto, entered into after January 1, 2006, for residential construction.” It would seem that the clearest and most logical construction would apply it only to contracts originally made after January 1, 2006, and thereafter amended, but there has been no judicial determination of this issue.
In addition, logically it would seem that this version of section 2782 should be applicable to construction contracts for residential construction between a builder and a subcontractor, entered between January 1, 2006, and December 31, 2008; however, legislative history relating to the 2008 amendment discussed below suggests a different result might occur.
2007 AMENDMENT
The second “post S.B. 800” amendment in 2007 (effective January 1, 2008), added subdivisions (e)(1) and (e)(2).
Subdivision (e)(1) added general contractors and subcontractors not affiliated with the builder and imposed essentially the same restrictions on provisions to indemnify, including the cost to defend, them as had been imposed on the “builder” by the 2005 amendment. The amendment refers to section 911 (b), again part of S.B. 800, to define general contractors, etc., not affiliated with the builder.
Subdivision (e)(1) essentially repeated the provisions of subdivision (d) permitting agreement to the timing and immediacy of the defense, the reference to the Presley Homes case, and the general contractor’s or subcontractor’s obligations under S.B. 800.
It appears this amendment was an attempt to harmonize the new restrictions on indemnity and defense provisions with S.B. 800. The 2005 amendment, whether by oversight or intent, covered only builders and not general contractors, although both classes are subject to the provisions of S.B. 800; the 2007 amendment added non-builder-affiliated general contractors.
Again, logically, it would seem that this version of section 2782 should be applicable to construction contracts for residential construction between a general contractor or contractor not affiliated with a builder and a subcontractor, entered between January 1 and December 31, 2008; however, legislative history relating to the 2008 amendment discussed below suggests a different result might occur. The same potential uncertainty regarding applicability to a contract entered before January 1, 2008, but amended after that date, exists for this provision as for the prior amendment, discussed above.
2008 AMENDMENT
The third “post S.B. 800” amendment in 2008 (effective January 1, 2009), reorganized the language relating to prohibited indemnity provisions, added a reference to insurance in that same prohibition, extensively rewrote the provisions governing agreements relating to the timing or immediacy of defense, added language preserving equitable indemnity claims, and added language defining “construction defect” by reference to the standards set forth in S.B. 800.
Subdivisions (a) and (b) remained unchanged.
Subdivision (c) now made a combined reference to builders (again by reference to section 911), as well as general contractors or contractors not affiliated with the builder (again by reference to section 911 (b)), rather than dealing with the two groups in separate but nearly identical subdivisions as previously. It otherwise restated the same limitations that were previously set forth separately in subdivisions (c) and (e), as well as the reference to the Presley Homes case, and the general contractor’s or subcontractor’s obligations under S.B. 800, but with one important addition. The word “insure” was added to the description of prohibited provisions, to-wit: “provisions? that purport to insure or indemnify, including the cost to defend, the builder, [etc.]? are unenforceable” to the extent they arise out of claims of the type previously described.
It is unclear what impact the addition of this single word “insure” will have; and, it will have to be read in light of the preservation of the language that it shall not affect the obligations of an insurance carrier under the holding of the Presley Homes case. Suppose a carrier had issued an additional insured endorsement under which it would otherwise be required to defend a builder or general contractor consistent with the Presley Homes rule: would this newly added single word (restricting the construction contract, to which the carrier is not a party) give the carrier a basis for denying coverage under the insurance contract? Or would the continued inclusion of the express language that it does not affect the obligations of an insurance carrier under Presley Homes control? That is surely an issue that will have to be worked out by the courts.
The new subdivision (d) addressed defense obligations. Again it permitted parties to agree to the timing and immediacy of the defense and provision for reimbursement of defense fees and costs, but imposed a very detailed scheme that appears to limit the extent of such agreement. A subcontractor owes no defense or indemnity obligation until the builder or general contractor provides a written tender of the claim, which has the same force and effect as notice of commencement of a legal proceeding. Upon that tender the subcontractor shall elect to follow one of two ways of performing: subdivision (d) (1) permits the subcontractor to defend with counsel of its choice and to control the defense, if the subcontractor gives written notice of this election within a reasonable time after receipt of the written tender and in no event later than 90 days following that receipt; subdivision (d) (2) provides an alternative by which the subcontractor pays a reasonable allocated share of the builder’s or general contractor’s defense fees and costs within 30 days of receipt of an invoice, subject to reallocation upon final resolution of the claim by settlement or judgment. Subdivision (e) sets forth remedies available to the builder or general contractor if a subcontractor fails to timely and adequately perform its obligations under either of the two alternatives in subdivision (d), including compensatory and consequential damages, reasonable attorneys’ fees in connection with the first alternative, and interest on defense and indemnity costs in connection with the second alternative. Subdivision (e) ends with provisions relating to reallocation of defense costs, and damages for failure to reallocate.
Application of these requirements in actual litigation is likely to be cumbersome and potentially fraught with conflicts. If retained pursuant to subdivision (d) (1) does the attorney represent the builder, the subcontractor, or both? To whom does the attorney owe his or her fiduciary duty? Can an appropriate informed written consent be formulated, for example, under Rule 3-310 of the California Rules of Professional Conduct, or Rule 1.7, ABA Model Rules of Professional Conduct? Could an attorney retained by a subcontractor blame the subcontractor if that is in the developer’s best interests? If multiple subcontractors elect to defend directly, how would the defense be coordinated among the potentially multiple attorneys so retained? Would an attorney retained by one subcontractor be able, or inclined, to blame another subcontractor who also chose to defend directly, in other words, what would prevent inconsistent defense positions amongst the various counsel retained by subcontractors for the developer? There may be solutions to such practical and professional considerations but it seems an ethical thicket awaits any attorney involved in such circumstances.
Subdivision (e) and (f) preserve equitable indemnity claims for the builder, general contractor or subcontractor, the first in general, the second as against any supplier, design profession, or product manufacturer. Finally, the 2008 amendment added for the first time, in subdivision (h), language defining "construction defect" as used in section 2782 as a violation of standards set forth in S.B. 800.
The inclusion of these last three subsections would seem to work against simplification of litigation. A builder or general contractor is likely to allege a claim for equitable indemnity against any and all subcontractors in addition to claims for contractual indemnity and defense (however limited by the other provisions of section 2782). Nothing in the section suggests the subcontractor should, or even can, somehow take on the representation of the builder, etc., in connection with a claim of equitable indemnity back against the subcontractor.
And the limited definition of “construction defect” in subdivision (h) appears to raise an issue of the applicability of the limitations set forth in subdivision (c). Although there is a school of thought that section 941 limits residential construction defect claims only to breach of the performance standards under S.B. 800, it is still common for CD complaints to plead other legal theories, e.g., breach of contract, breach of warranty, negligence, etc., in addition to violation of S.B. 800 standards. With the addition of subdivision (h) it is arguable that the restrictions on indemnity and defense provisions spelled out in subdivisions (c) and (d), both of which relate to claims for residential construction defects, are applicable only to claims for violation of S.B. 800 standards, and not other residential construction defect claims. In other words, a developer might conceivably still be entitled to a broader scope of indemnity and concomitant defense for other types of claims, such as breach of contract, breach of warranty, negligence, etc., so long as the indemnity does not violate the limitation of subdivision (a) against Type I indemnity, which as noted above, has remained intact through these revisions.
Finally, it would seem that this version of section 2782 should be applicable to contracts executed between builders, general contractors, etc., on the one hand and subcontractors on the other hand on and after January 1, 2009. And, as noted above in connection with the 2005 and 2007 amendments, logic would suggest that those versions would ordinarily apply to contracts executed during the time periods mentioned above. But, the Legislative Counsel’s Digest for the 2008 amendment as it finally was enacted into law includes the following statements:
This bill would delete the provisions applicable to construction contracts entered into on or after January 1, 2008, that purport to indemnify the general contractor or contractor not affiliated with the builder. The bill would revise the provisions applicable to contracts entered into after January 1, 2006, to instead apply to contracts entered into after January 1, 2009, and to apply to agreements that purport to insure or indemnify the builder or the general contractor or contractor not affiliated with the builder, as described.
Although it seems a startling result, this legislative history suggests an argument can be made that the 2008 amendment retroactively nullified the effect of the 2005 and 2007 amendments, so that contracts executed from January 1, 2006, as to builders or January 1, 2008, for general contractors, etc., through December 31, 2008, are still governed by the provisions of section 2782 as it was on the books prior to the first post-S.B. 800 amendment in 2005.
2011 AMENDMENT
Section 2782 has been amended yet again in the 2011 session of the California Legislature, effective January 1, 2012; however, the substantive changes affect certain contracts entered on or after January 1, 2013. All of the provisions contained in the 2008 amendment have been carried forward in the most recent amendment, although re-numbered: (c) became (d), etc., through (h) becoming (i). So, the law governing construction contracts entered into after January 1, 2009, for residential construction, as between a builder, or a general contractor, etc., not affiliated with a builder, and regarding insurance, indemnity or defense relating to claims for construction defects, remains the same as in the 2008 amendment.
As noted above the substantive changes to section 2782 all affect contracts entered into on or after January 1, 2013. Subdivision (b) has been amended such that any provision in a contract with a public agency that purports to impose on any contractor, etc., or relieve the public agency from, liability for the active negligence of the public agency will be void and unenforceable. A new subdivision (c) has been added that imposes a similar restriction on construction contracts with the owner of privately owned real property to be improved and as to which the owner is not acting as a contractor or supplier of materials or equipment to the work. This new restriction in subdivision (c) does not apply to a homeowner performing a home improvement project on his or her own single family dwelling.
The 2011 bill amending section 2782 also added a new section 2782.05, which will make void and unenforceable any provision in any construction contract (again, entered on or after January 1, 2013) that purports to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor, by a subcontractor for claims that arise out of the active negligence or willful misconduct of the general contractor, etc., or other independent contractors, etc., or to the extent the claims do not arise out of the scope of work of the subcontractor. However, the section also includes a long list of situations to which it does not apply, including all of those covered by section 2782 (residential construction subject to S.B. 800, public agency contracts subject to section 2782 (b), and direct contracts with private property owners subject to the new section 2782 (c)) as well as eight other categories. This apparently is intended to serve as a “catch-all” to extend a limitation on indemnity agreements to all construction contracts not previously swept into this widening legislative scheme, although the exact phrasing is slightly different.7
The new section 2782.05 then permits a mutual agreement to the timing or immediacy of a defense under a scheme essentially identical to that imposed in the 2008 amendment to section 2782: defend with counsel of choice, and maintain control of the defense; or, pay a reasonable allocated share of defense fees and costs. The same logistical and ethical difficulties presented by the 2008 scheme discussed above would likely be present in cases that fall under the new section 2782.05.
CONCLUSION
The California Legislature has been revising section 2782 since shortly after the adoption of S.B. 800. Each revision has been more complicated than the last, and each has tied certain provisions of section 2782 more closely to S.B. 800. In particular, with regard to construction defect claims relating to residential dwellings which are subject to S.B. 800, the Legislature has apparently attempted to exercise more and more control over the scope of allowable indemnity and dictated a very narrow scheme to govern how the defense obligation arising from a contractual indemnity is to be implemented. It seems likely that any attempt to manage the defense of a construction defect case under the options that allow a subcontractor to defend directly and control the defense will create a logistical problem and an ethical difficulty for any attorney attempting to defend a developer at the behest and direction of a subcontractor. Finally, as set forth in the current version of section 2782 relating to contractual indemnity and defense of S.B. 800 type cases (subdivisions (c) through (h) in the 2008 version, now subdivisions (d) through (i) in the 2011 amendment), the Legislature has apparently narrowed the application to only claims of violation of S.B. 800 standards. This may have, in essence, removed the restrictions on indemnity and defense provisions as they relate to other theories pleaded against developers in construction defense cases, e.g., breach of contract, breach of warranty, negligence, and the like. It is not at all clear that the Legislature has accomplished what it set out do accomplish. Rather, the law may have come full circle back to where it began, except for one legal theory, i.e. violation of S.B. 800 standards, currently being used in residential construction defect cases. For any other legal theory the limitation of section 2782 (a) may be solely controlling.
- California Civil Code section 43.99, and sections 895 to 945.5.
- All statutory references in this article are to the California Civil Code unless otherwise specified.
- Type I or specific indemnity does not exactly match the scope of proscribed indemnity as described in section 2782 (a) but it is the closest. More recent case law in California has eschewed a mechanical application of the MacDonald & Kruse typology in favor of examining the precise text of the actual contract (See, e.g., St. Paul Mercury Ins. Co. v. Frontier Pacific Ins. Co. (2003) 111 Cal.App.4th 1234, 1246, n. 6) but some recent cases still use the Type I, II and II classifications. And, an understanding of that “historical” typology is useful as an aid to evaluating and understanding express indemnity in general.
- The provisions of S.B. 800 other than the prelitigation procedures of sections 910 through 938 apply to general contractors, subcontractors, etc., pursuant to section 936. The prelitigation procedures generally involve a “builder,” which is specifically defined in section 911 (a) by reference to entities or individuals in the business of selling residential units to the public or of building, developing, or constructing residential units for public purchase. Pursuant to section 911 (b) the term builder does not include general contractors, etc., not affiliated with the builder. Thus, a general contractor who constructs residential housing pursuant to a contract with a public agency is still subject to claims for violation of the standards set forth in sections 896 and 897, resulting from its negligent act or omission or breach of contract, pursuant to section 936.
- As noted above, there has been no case law yet interpreting any of the “post S.B. 800” changes to Section 2782. One of the most important legal decisions relating to express indemnity and defense obligations and rights between developer-builders and sub-contractors was published after two of the amendments but based upon contracts executed and the language of section 2782 prior to January 1, 2006. (See, Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 547, 566-67, fn. 14).
- Subcontractor dissatisfaction with the perceived inadequacy of protection afforded by this provision apparently became the impetus for a 2008 amendment to section 2782, discussed below, at least based upon the numerous (form) letters submitted to legislators in connection therewith.
- Section 2782 (a), where we started, and which has continued without change, prohibits indemnity for claims arising out of the sole negligence or willful misconduct of the promisee; sole negligence can be either active or passive. The various versions relating to residential construction prohibit indemnity for the negligence of the builder, etc., suggesting there is no express contractual indemnity for the negligence of the subcontractor if the builder, etc., is at all negligent. This is tempered a bit by the preservation of the right to equitable indemnity, which will now be found in section 2782 (g) and (h).
Courtesy of Michael D. Worthing of Borton Petrini, LLP. Mr. Worthing can be contacted at mworthing@bortonpetrini.com.
Homeowners May Not Need to Pay Lien on Defective Log Cabin
July 1, 2011 — CDJ Staff
The Idaho Supreme Court has ruled in the case of Perception Construction Management v. Bell. The Bells hired PCM to build a log home, agreeing to play monthly invoices in full within ten days. The Bells paid the first four invoices in full, part of the fifth, and ceased payment after that. Beofre seventh invoice, the Bells terminated the contract and hired a new contractor. PCM filed a claim of lien and ceased work.
The Bells responded that PCM was in breach of contract and had failed to fulfill the contract in a workmanlike manner. They claimed construction defects and in the lien suit, sought to include testimony from an architect and a plumber reviewing PCM’s work. The court only allowed the architect to testify as to whether the amount of the lien was reasonable. No testimony was permitted from the plumber.
The Idaho Supreme Court concluded that the claims of construction defects were important to case and remanded it to the lower court for a new trial taking into evidence that Bell’s contention that PCM’s work was defective.
Read the court’s decision
Lockton Expands Construction and Design Team
July 19, 2011 — CDJ Staff
Lockton Companies, LLC, the largest privately held independent insurance broker, has announced that it is expanding its construction and design team with the hiring of Karen Erger and Tom Miller.
Ms. Erger will provide professional liability practice management, loss prevention, contract and complex claims management consulting services to Lockton's architectural, engineering and construction clients in her role as Vice President, Director of Practice Management. Her background includes construction litigation at a leading construction law firm, professional liability claims defense and claims consulting for major professional liability underwriters.
Miller joins Lockton as a Senior Vice President within the Design and Construction Unit. His role will be dedicated to serving the needs of engineering, architecture and construction firms performing services around the globe. He has spent more than 15 years concentrating on professional liability for design professionals and contractors in multiple roles. He previously managed the professional liability underwriting of one of the largest construction insurers and has developed numerous manuscript insurance products as well as focused on strategic planning to enhance business unit opportunities.
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Sometimes It’s Okay to Destroy Evidence
August 17, 2011 — CDJ Staff
The Minnesota Supreme Court has ruled in the case of Miller v. Lankow that Mr. Miller was within his rights to remediate his home, even though doing so destroyed the evidence of water intrusion.
Linda Lankow built a home in 1992. In 2001 or 2002, Lankow discovered a stucco problem at the garage which she attributed to moisture intrusion. She asked the original contractor to fix the wall. In 2003, Lankow attempted to sell her home, but the home inspection revealed fungal growth in the basement. Lankow made further repairs, including alterations to the landscaping.
In 2004, Lankow put her house on the market once again and entered into an agreement with David Miller. Miller declined to have an independent inspection, as the home had been repaired by professional contractors.
In 2005, Miller put the house on the market. A prospective buyer requested a moisture inspection. The inspection firm, Private Eye, Inc. found “significant moisture intrusion problems.”
Miller hired an attorney who sent letters to the contractors and to Lankow and her husband. Lankow’s husband, Jim Betz, an attorney, represented his wife and sent a letter to Miller’s attorney that Miller had declined an opportunity to inspect the home.
In 2007, Miller’s new attorney sent letters to all parties that Miller had decided to begin remediation work on the house. All stucco was removed. Miller then filed a lawsuit against the prior owners, the builders, and the realtors.
Two of the contractors and the prior owners moved for summary judgment on the grounds that Miller had spoliated evidence by removing the stucco. They requested that Miller’s expert reports be excluded. The district court found for the defendants and imposed sanctions on Miller.
The Minnesota Supreme court found that “a custodial party’s duty to preserve evidence is not boundless,” stating that “it may be particularly import to allow remediation in cases such as the one before us.” Their reasoning was that “remediation of the moisture intrusion problem in the home may be necessary, even essential, to address immediate health concerns.”
Given that Miller needed to remediate the problem in order to continue living there, and that he had given the other parties a “full and fair opportunity to inspect,” the court found that he was within his rights. The court reversed the judgment of the lower court and remanded it to them for review.
Read the court’s decision…
Construction Defects: 2010 in Review
July 10, 2012 — CDJ Staff
Candace Matson, Harold Hammersmith, and Helen Lauderdale, all of Sheppard Mullin, recently looked at design and construction defect litigation in 2010. They look at three California construction law cases. In one prominent case, the developer’s claims were barred under California law. However, the court did allow a claim for breach of the duty to defend.
In a second case, the California Supreme Court ruled that a duty to defend is separate from a duty to indemnify. A developer sought to include its engineering subcontractor in a suit. The subcontractor unsuccessfully argued that it had no duty to defend as the homeowners had not sued it.
The third case involved a lawyer who had represented a homeowner accused a libel against a construction firm and then later represented one of the subcontractors the firm had employed. The California Court of appeals concluded that there was no conflict of interest and so the contractor could not disqualify the subcontractor’s lawyer.
Read the full story…
El Paso Increases Surety Bond Requirement on Contractors
April 25, 2011 — April 25, 2011 Beverley BevenFlorez - Construction Defect Journal
The city of El Paso has recently increased surety bonds required of contractors from $10,000 to $50,000, according to the El Paso Times. Proponents of the increase believe it was necessary to protect homeowners from fly-by-night builders, while opponents argue that the increase will have an adverse effect on an industry in that is already suffering due to the economic slowdown.
Arguments for and against the increase have been flooding the blogosphere with their views. Christian Dorobantescu on the Small Business Entrepreneur Blog claims that “only about 15% of the city’s 2,500 contractors had been able to secure a higher bond to remain eligible for work after the new requirements were announced.” However, insurance companies have a different take. “From a surety broker standpoint, most contractors will be able qualify for the bond; some will just have to pay higher premium rates to obtain it,” a recent post on the Surety1 blog argues.
While the increased bond may help homeowners deal with construction defect claims, it is not clear what effect it will have on builders in El Paso.
Read more from the El Paso Times…
Read more from the Small Business Entrepreneur Blog…
Read more from the Surety1 Blog…
Texas exclusions j(5) and j(6).
April 27, 2011 — April 27, 2011, by CDCoverage.com
In Evanston Ins. Co. v. D&L Masonry of Lubbock, Inc., No. 07-10-00358-CV (Tex. Ct. App. April 18, 2011), insured masonry subcontractor D&L sued its CGL insurer Evanston to recover costs incurred by D&L for the replacement of window frames damaged by D&L while performing masonry work adjacent to the window frames. The trial court granted summary judgment for D&L.
Read the full story…
Reprinted courtesy of CDCoverage.com
Going Green for Lower Permit Fees
October 23, 2012 — CDJ Staff
Clay County, Kansas is offering rebates on building permits for green homes. According to the Kansas City Star, building permits in the county are typically $2,500. The county will rebate anything from half to all of the permit fee, depending on how well the builder meets green standards. The county will monitor and inspect the process to make certain that builders adhere to their promises for green construction. The county hopes this will encourage green building by offsetting the cost.
Read the full story…
Colorado “occurrence”
January 6, 2012 — CDCoverage.com
In Greystone Construction, Inc. v. National Fire & Marine Insurance Co., No. 09-1412 (10th Cir. November 1, 2011), general contractors Greystone and Branan were each sued by purchases of homes built by each alleging defective construction performed by subcontractors. CGL insurer American Family Mutual Insurance Company defended both Greystone and Brannon while co-insurer National Fire & Marine Insurance Company denied a defense. Greystone, Branan, and American Family sued National Fire for contribution towards defense costs. The federal district trial court entered summary judgment for National Fire.
Read the full story…
Reprinted courtesy of CDCoverage.com
